American Airlines has been taking advantage of market opportunities to steadily lower its cost of funding, saving it millions in interest expenses.
The Fort Worth-based carrier has taken advantage of market arbitrage opportunities to shave up to 175bps off the margin over Libor on its $4.83 billion term-loan portfolio since its December 2013 merger with US Airways, financial filings and FlightGlobal research show.
These regular moves by American's treasury team – amendments or refinancings of the four term loans have occurred at least once a year since the merger – have netted the carrier millions of dollars in interest-rate savings, which benefits its bottom line.
"It's a purely opportunistic play where you're taking advantage of market technicals and our improving credit story," Amelia Anderson, managing director and assistant treasurer at American, tells FlightGlobal.
The airline's treasury team monitors the term-loan market closely and, when one of its four loans in the market are trading at least an eighth above par, moves quickly – sometimes within a week – to shave the margin on a particular facility, she says.
In its most recent move in June, American trimmed 50bps off the margin – to 200bps over Libor – on the $735 million outstanding under its 2014 credit facility. This was the third amendment, and fourth reduction, to the margin on the loan, which closed at 350bps over Libor in October 2014.
The amendment will save the carrier roughly $3.5 million annually through maturity in 2021, says James Hall, director of treasury at American.
A second amendment to American's 2013 credit facility in March will net it roughly $9 million in annual interest-expense savings from a 50bps reduction in the interest-rate margin to 200bps over Libor, says Hall.
There was $1.8 billion outstanding under the term loan due in March.
American priced the original $1.05 billion term loan due in 2019 at a margin of 375bps over Libor in June 2013. It was upsized to $1.9 billion in August 2013 and the maturity was extended by a year in May 2015.
American made similar changes to the remaining two term loans in its portfolio. It reduced the margin by 50bps to 275bps over Libor on the B-1 tranche of the US Airways 2013 credit facility, also known as the Citicorp credit facility, by December 2016 when it replaced the $970 million outstanding with a new $1.25 billion term-loan facility.
The maturity on the loan was also extended to 2023 from 2019.
The carrier reduced the margin on the B-2 tranche of the same US Airways facility by 25bps to 225bps over Libor prior to replace the $588 million outstanding with a new $1 billion secured term-loan facility in April 2016. The new facility priced at 275bps over Libor and extended the maturity to 2023 from 2016.
All of these margin reductions net American savings. While Hall and Anderson did not comment on how much all of margin reductions on the term loans have netted the airline, Anderson says they measure the benefits in terms of net present value.
Other metrics also show a decline in interest expenses at American. The carrier's EBIT-to-interest-expense ratio was down half a point to 2.9x at the end of March from 3.4x at the end of 2015, Moody's Investors Service data shows.
CAPITALISING ON DEMAND
Two factors have allowed American make these margin arbitrage plays, says Hall: one, the fact that demand outstrips supply for the carrier's debt and, two, its improving credit story.
Demand has for years outstripped supply for the American paper. Its regular capital markets transactions have been oversubscribed – for example, the $537 million AA tranche of its 2017-1 enhanced equipment trust certificates (EETC) was roughly 4x oversubscribed in January – with arrangers repeatedly saying there is high interest in the carrier's debt.
The team's repeated ability to reduce its cost of funding in the term-loan market shows that this demand for American's credit exists beyond the capital markets.
Fitch Ratings, Moody's and S&P Global have rated American "BB-", "Ba3" and "BB-", respectively, since 2015. All of the ratings are one notch higher than when the US Airways merger closed.
The carrier maintains a high debt-to-EBITDA leverage ratio due to its high aircraft capital expenditures. The metric was 4.6x at the end of March, up slightly from 4.3x at the end of 2016, according to Moody's.
American expects capital expenditures to fall from 2018 once the majority of its narrowbody fleet replacement programme wraps. This should reduce its need to raise new debt to fund aircraft deliveries.
With the margin reductions, American capitalised on the low-interest-rate environment just as rates have begun to rise again. One-month Libor was up more than a percentage point since early 2014 to 1.22% on 11 July, and the US Federal Reserve has raised its benchmark rate four times to 1-1.25% since December 2015.
Source: Cirium Dashboard
